Merrill deal may open legal floodgates

AllenWan

NEW YORK (CBS.MW) -- Merrill Lynch's settlement with the New York state attorney general could pry open the gates to more lawsuits against the country's leading broker and other Wall Street firms, the attorney general and lawyers said.

In an unprecedented deal announced Tuesday, Merrill Lynch agreed to make an apology for alleged conflict of interests among its analysts and to pay $100 million in fines. See full story.

However, that settlement won't shield Merrill from dozens of suits worth billions of dollars that have been filed in the interval since the New York attorney general pursued action against Merrill. The firm faces at least 28 class-action investor lawsuits.

"They can expect a flood of lawsuits," said John Lawrence Allen, a plaintiffs' attorney specializing in securities actions and handling several suits and arbitration cases versus several brokers, including Merrill
MER, +0.51%

New York state Attorney General Eliot Spitzer said that he expects the settlement with Merrill Lynch over the alleged conflict of interest of its analysts to strengthen the hand of those suing the broker and other Wall Street firms.

Spitzer said he had not expected Merrill to admit to any wrongdoing as that would have opened the floodgates to litigation. "If Merrill had done so it would have been a death warrant for the company," he said.

He said the potential cost to Merrill from the lawsuits could be in the billions of dollars.

Spitzer said he was in talks with other investment banks as part of a wider probe but declined to say who they were.

Shares of Wall Street firms initially rallied on the news, but climbed down after analysts expressed concern that Merrill and other brokers could be hit by a flood of lawsuits over the way they dispensed investment advice.

Merrill ended 47 cents, or 1.1 percent, higher at $43.85.

Analyst Riley Tierney of Fox, Pitt Kelton called the deal "half-empty, half-full" as it allows Merrill to avoid going to trial, but leaves open the question of legal liability. "The agreement leaves legal questions unanswered," he said. "It's only one step forward as this thing has tentacles that have yet to play out."

But Merrill Chief Operating Officer Stan O'Neal dismissed those fears, saying "We continue to believe we will prevail in these suits. Our integrity in our research was maintained."

Prudential Securities said that with settlement terms coming in better than expected for Merrill, the main factor hurting the stock right now are concerns over civil liability, though it believes any Merrill exposure would be modest.

Lawyers react

Lawyer Steven Toll of Cohen, Milstein, Hausfeld & Toll called the Merrill settlement a "drop in the bucket compared to what investors have lost." Toll's law firm is one of several firms that have filed a class-action lawsuit against Merrill Lynch but he said he didn't think there would be "much of an impact on our case."

Cohen, Milstein, Hausfeld & Toll is suing Merrill Lynch and the now-departed Internet analyst Henry Blodget on behalf of people who bought stock in Internet Capital Group
ICGE

"We think what the attorney general did was terrific. It exposed what was going on and allowed investors to seek compensation for those who overpaid," said Stanley Grossman of the law firm of Pomerantz Haudek Block Grossman & Gross.

Pomerantz Haudek Block Grossman & Gross has filed a class action lawsuit on behalf of investors who purchased the stock of GoTo.com -- one of the high-flying stocks that crashed after Merrill touted it publicly but disparaged privately. GoTo has since changed its name to Overture
OVER, +15.79%

It said it has also filed a lawsuit against Goldman Sachs
GS, +2.50%
for its alleged mishandling of the EToys IPO.

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